Mark Artherton, CFA

Inteqres

Thematic (Sector/Industry)

Several countries are pushing for more M&amp;A in Asian banking as a way to ameliorate risks (India) or to possibly compete more regionally (Malaysia), with even some rumours resurfacing of further activity in Australia. We have reviewed all major banking transactions in the Asia Pacific region over the past 10 years which involved consolidation and we summarise our findings below.Summary findingsWe find that most banks lose market share after a merger when we consider total assets.  This is usually due to depositors moving to reduce concentration risk and loan rationalisation by the merged entity. Overlapping banks allow for more synergies and there tends to be better performance, especially if management is able to achieve the synergistic gains quickly.  Mergers aimed more at revenue synergies or entering new markets appear to have lukewarm benefits.A long drawn out merger process with unambitious long term synergistic benefits are penalised by markets.  Delays can be cultural, labour union led, government led or legal.Clearly the lead in any transaction tends to impose their will on the combined entity.  We find that performance suggests that investors are better owing targets rather than acquirers.

Several countries are pushing for more M&amp;A in Asian banking as a way to ameliorate risks (India) or to possibly compete more regionally (Malaysia), with even some rumours resurfacing of further activity in Australia. We have reviewed all major banking transactions in the Asia Pacific region over the past 10 years which involved consolidation and we summarise our findings below.Summary findingsWe find that most banks lose market share after a merger when we consider total assets.  This is usually due to depositors moving to reduce concentration risk and loan rationalisation by the merged entity. Overlapping banks allow for more synergies and there tends to be better performance, especially if management is able to achieve the synergistic gains quickly.  Mergers aimed more at revenue synergies or entering new markets appear to have lukewarm benefits.A long drawn out merger process with unambitious long term synergistic benefits are penalised by markets.  Delays can be cultural, labour union led, government led or legal.Clearly the lead in any transaction tends to impose their will on the combined entity.  We find that performance suggests that investors are better owing targets rather than acquirers.

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

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<li>
Chinese Real Estate Risk:Mainland China’s debt-laden developers were already facing a cash-crunch, but the corona virus outbreak has exacerbated developer problems and is taking major toll on the entire property market. According to the China Real Estate Chamber of Commerce (CRECC), most builders only have a cash buffer of just three months.</li>
<li>
 Bank of East Asia Highly Exposed:Of the Hong Kong banks, Bank of East Asia (23.HK) BEA, has the largest percentage exposure to mainland China.  After years of credit problems in its mainland China book, management has finally gotten around to conducting a qualitative assessment of its NPL classifications, which included variables such as primary repayment,  collateral value, and refinancing. Assume significant credit weakness from the slowing mainland economy in 2020 and beyond.</li>
<li> Other Banks With China Property Risk:No doubt every Hong Kong and mainland Chinese bank has risk to the mainalnd Chinese developers in size, but little known is the risk that the dollar desperados in Japan have. Some of the largest USD exposures of MUFG, Mizuho, and SMFG all have come in the form of mainland Chinese developer loans.  </li>
</ul>



Chinese Real Estate Risk:Mainland China’s debt-laden developers were already facing a cash-crunch, but the corona virus outbreak has exacerbated developer problems and is taking major toll on the entire property market. According to the China Real Estate Chamber of Commerce (CRECC), most builders only have a cash buffer of just three months.

 Bank of East Asia Highly Exposed:Of the Hong Kong banks, Bank of East Asia (23.HK) BEA, has the largest percentage exposure to mainland China.  After years of credit problems in its mainland China book, management has finally gotten around to conducting a qualitative assessment of its NPL classifications, which included variables such as primary repayment,  collateral value, and refinancing. Assume significant credit weakness from the slowing mainland economy in 2020 and beyond.
 Other Banks With China Property Risk:No doubt every Hong Kong and mainland Chinese bank has risk to the mainalnd Chinese developers in size, but little known is the risk that the dollar desperados in Japan have. Some of the largest USD exposures of MUFG, Mizuho, and SMFG all have come in the form of mainland Chinese developer loans.  


Bank of East Asia - Trail of Tears For Chinese Developer Loans

Mitsubishi UFJ Financial (MUFG) / Equity Bottom-Up

<ul>
<li>
Morgan Stanely/E*Trade Transaction: Morgan Stanley (MS.US) announced its intention to acquire ETFC.US for approximately USD 13 bn in an all stock transaction. According to Morgan Stanley, this deal is expected to be earnings accretive once ETFC is fully integrated and the aforementioned synergies are realized. In other words, over the next three years, ETFC will be earnings dilutive to Morgan Stanley.</li>
<li>
MUFG Should Worry About EPS Dilution: Given that Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of Morgan Stanley on a fully diluted basis, and prior to this transaction Morgan Stanley represented an estimated and outsized 25.4% of MUFG's FY (March) 2019 bottom-line - despite MUFG's high reliance on gains. The ETFC transaction dilutes MUFG's Morgan Stanley stake by 2.55% to 20.01%. This transaction is anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 160 mn or close to 8.0% YOY or 2% overall for MUFG in FY 2020.   </li>
<li>
MUFG Already Has Enough Headaches: Earnings at MUFG is quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures at Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too will weigh on future results. </li>
</ul>



Morgan Stanely/E*Trade Transaction: Morgan Stanley (MS.US) announced its intention to acquire ETFC.US for approximately USD 13 bn in an all stock transaction. According to Morgan Stanley, this deal is expected to be earnings accretive once ETFC is fully integrated and the aforementioned synergies are realized. In other words, over the next three years, ETFC will be earnings dilutive to Morgan Stanley.

MUFG Should Worry About EPS Dilution: Given that Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of Morgan Stanley on a fully diluted basis, and prior to this transaction Morgan Stanley represented an estimated and outsized 25.4% of MUFG's FY (March) 2019 bottom-line - despite MUFG's high reliance on gains. The ETFC transaction dilutes MUFG's Morgan Stanley stake by 2.55% to 20.01%. This transaction is anticipated to dilute MUFG's earnings attributable to Morgan Stanley by USD 160 mn or close to 8.0% YOY or 2% overall for MUFG in FY 2020.   

MUFG Already Has Enough Headaches: Earnings at MUFG is quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures at Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too will weigh on future results. 


Mitsubishi UFJ Financial Group - MS Deal Compounds Earnings Challenges

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

In our Smartkarma Originals Insight on Ride Hailing last year, we articulated our view as being sceptical of the ability of pure ride hailers to generate noticeably different margins from regular taxi companies. However, we highlighted Grab and Go-Jek as having interesting business models due to their attempts to develop digital finance businesses. With the Nikkei reporting that MUFG will shortly invest as much as ¥80bn in Grab to tap its digital and data expertise we are increasingly confident in our call that the path to profitability for Grab and Go-Jek looks a lot less uncertain than for many of their global peers.

In our Smartkarma Originals Insight on Ride Hailing last year, we articulated our view as being sceptical of the ability of pure ride hailers to generate noticeably different margins from regular taxi companies. However, we highlighted Grab and Go-Jek as having interesting business models due to their attempts to develop digital finance businesses. With the Nikkei reporting that MUFG will shortly invest as much as ¥80bn in Grab to tap its digital and data expertise we are increasingly confident in our call that the path to profitability for Grab and Go-Jek looks a lot less uncertain than for many of their global peers.

MUFG GRABbing at the Chance to Serve ASEAN’s Unbanked

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/367/original/2020-02-05_03-43-39.png?1580847984" class="editor-image img-responsive" data-smartkarma-image-id="116367"></figure><div class="content-caption">Source • Japan Analytics</div>4TH FEBRUARY ROUNDUP - As expected the 121 Results and 41 Forecast/Revision announcements yesterday took our Results Score 16bps lower to a new three-year low, although the Score is still positive. The Forecast/REvision Score added 13bps helped by <a href="https://www.smartkarma.com/entities/takeda-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:11747:1" rel="noopener">Takeda Pharmaceutical (4502 JP)</a> and <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao (4452 JP)</a> although the latter's forecast is optimistic as we discuss in the DETAIL below.<hr>• SECTOR TIMELINE •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/368/original/2020-02-05_03-47-58.png?1580848469" class="editor-image img-responsive" data-smartkarma-image-id="116368"></figure><div class="content-caption">Source • Japan Analytics</div>SECTOR TIMELINE - <a href="https://www.smartkarma.com/entities/hoya-corp" target="_blank" data-smartkarma-citation="entities:8990:1" rel="noopener">Hoya (7741 JP)</a>'s results were the largest factor in the decline in the Other Commerical Products Sector. <a href="https://www.smartkarma.com/entities/takeda-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:11747:1" rel="noopener">Takeda Pharmaceutical (4502 JP)</a> helped Healthcare tick up, while <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-gro" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a> fuelled the strong recovery in the Banks Sector.  <a href="https://www.smartkarma.com/entities/systena-corp" target="_blank" data-smartkarma-citation="entities:20438:1" rel="noopener">Systena (2317 JP)</a> and <a href="https://www.smartkarma.com/entities/ntt-data-corp" target="_blank" data-smartkarma-citation="entities:11232:1" rel="noopener">NTT Data (9613 JP)</a> added to the erosion of the Information Technology Sector's lead, although partially offset by <a href="https://www.smartkarma.com/entities/itochu-techno-solutions-corp" target="_blank" data-smartkarma-citation="entities:2431:1" rel="noopener">Itochu Techno Solutions (4739 JP)</a>.  <a href="https://www.smartkarma.com/entities/mitsui-co-ltd" target="_blank" data-smartkarma-citation="entities:20799:1" rel="noopener">Mitsui (8031 JP)</a> 21% yoy decline in Q3 Net Income continued to downtrend in the Wholesale Sector's Score.

Source • Japan Analytics4TH FEBRUARY ROUNDUP - As expected the 121 Results and 41 Forecast/Revision announcements yesterday took our Results Score 16bps lower to a new three-year low, although the Score is still positive. The Forecast/REvision Score added 13bps helped by Takeda Pharmaceutical (4502 JP) and Kao (4452 JP) although the latter's forecast is optimistic as we discuss in the DETAIL below.• SECTOR TIMELINE •Source • Japan AnalyticsSECTOR TIMELINE - Hoya (7741 JP)'s results were the largest factor in the decline in the Other Commerical Products Sector. Takeda Pharmaceutical (4502 JP) helped Healthcare tick up, while Mitsubishi UFJ Financial (MUFG) (8306 JP) fuelled the strong recovery in the Banks Sector.  Systena (2317 JP) and NTT Data (9613 JP) added to the erosion of the Information Technology Sector's lead, although partially offset by Itochu Techno Solutions (4739 JP).  Mitsui (8031 JP) 21% yoy decline in Q3 Net Income continued to downtrend in the Wholesale Sector's Score.   

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 4th February ▲2371 4502 4739 ▼7741 4452 2317

Japan

Mitsubishi UFJ Financial Group, Inc. (MUFG) is a holding company established through the merger of Mitsubishi Tokyo Financial Group and UFJ Holdings. As a financial group, the Company provides a variety of financial and investment services including commercial banking, trust banking, international finance, and assets management services.

Mitsubishi UFJ Financial (MUFG) ADR (MUFG US)

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Mitsubishi UFJ Financial (MUFG) ADR (MUFG US)

Bank M&A in Asia – a Decade in Review

Several countries are pushing for more M&A in Asian banking as a way to ameliorate risks (India) or to possibly compete more regionally...

Mark Artherton, CFA

Bank of East Asia - Trail of Tears For Chinese Developer Loans

Chinese Real Estate Risk:Mainland China’s debt-laden developers were already facing a cash-crunch, but the corona virus outbreak has exacerbated...

Thomas J. Monaco

Mitsubishi UFJ Financial Group - MS Deal Compounds Earnings Challenges

Morgan Stanely/E*Trade Transaction: Morgan Stanley (MS.US) announced its intention to acquire ETFC.US for approximately USD 13 bn in an all stock...

Thomas J. Monaco

MUFG GRABbing at the Chance to Serve ASEAN’s Unbanked

In our Smartkarma Originals Insight on Ride Hailing last year, we articulated our view as being sceptical of the ability of pure ride hailers to...

Mio Kato

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 4th February ▲2371 4502 4739 ▼7741 4452 2317

4TH FEBRUARY ROUNDUP - As expected the 121 Results and 41 Forecast/Revision announcements yesterday took our Results Score 16bps lower to a new...

Campbell Gunn

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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